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As of 22 Jan 2023 – Share Price: $15.92 | Market Cap: $1840.7M USD | EV/Revenue: 3.1x
By Grant Mao, Jessica Zhang, Benjamin Shi
Company Overview:
Warby Parker is an eyewear retail company that offers prescription eyeglasses, sunglasses, contacts, accessories, and eye exams. It was founded as a primarily online retailer, but now sells through ~200 physical retail store locations across the U.S. and Canada. It is vertically integrated as it designs eyewear from concept to construction in-house and sells directly to customers to reduce costs. Warby launched daily contacts under its private label brand, Scout, in 2019, and is evolving from a glasses-only company to a holistic vision care company. The company is expanding its physical retail presence has a revenue breakdown of 53.9% e-commerce and 46.1% retail.
Industry Overview:
The Global Eyewear Market was valued at $140B in 2021 and is projected to reach almost $209.5B by 2027 with a CAGR of 6.96% from 2022-2027. North America generated a revenue of USD 30.87B in 2020 & is expected to hold the market’s highest share (2021-2018). The eyewear market is an expansive industry with positive outlooks despite setbacks from the pandemic which led to supply-chain disruptions and the closure of ophthalmic clinics and retail stores. Driven by new digital technologies, brands are able to reach more consumers and customize unique products. Most notably, international expenditure on eyewear is growing strongly as there is rising prevalence of ocular diseases and a growing geriatric population.
A few growth drivers in the industry are pushing the industry forward. There is an increasing prevalence of ocular diseases due to a rise in computer vision syndrome from digital products, and by 2050, ~50% of the global population will have myopia. There is also a growing geriatric population, leading to an increased awareness of early diagnosis of eye-related disorders. Finally, the rise in disposable incomes and awareness of harmful UV rays has led to the high growth of the sunglasses segment (CAGR of 7.21%).
A few industry trends include an interest in premium-branded, fashionable, customizable, eco-friendly eyewear and an emphasis on combining digital and retail channels. Warby’s biggest competitor is Essilor Luxottica, with a few other key players including Grandvision, Hoya, and Johnson and Johnson.
Investment Theses:
The market is underappreciating Warby Parker’s strategic pivots. Specifically, there is a lack of awareness of the Warby brand’s unique competitive advantage through vertical integration that bolsters differentiation and profitability, an overly negative view of current margins, and an underestimation of the retail segment that is contributing to omnichannel success.
Warby Parker has found a competitive advantage through vertical integration by transferring value to consumers, designing frames in-house, and working directly with suppliers.
Warby returns $97 of value back to customers compared to Essilor Luxottica and competitors
Warby designs, manufactures, and inserts the lenses in house -there are no licensing fees that increase markup. They also ship directly to customers and eliminate the middleman. This creates an affordable purchase point below $100, giving them access to lower end consumers and more frequent and larger sized purchases from higher end consumers.
Warby also has a distinct brand identity centered around purpose. Their Buy a Pair, Give a Pair program has donated 10 million glasses in 50+ countries. Furthermore, their relatable identity to modern consumers has increased loyalty from the modern consumer: 83% loyalty score vs 62% for Luxottica.
Warby has continued its integration
Warby has a similar gross profit to Essilor Luxottica: 58.8% and 62% respectively, but Warby has control over a majority of the supply chain, allowing flexibly adjustments and mitigations of disruptions in global supply.
Warby is integrating medical providers - telehealth, optometrists, on-site eye exams, virtual eye care and insurance, which Increases its competitive advantage and control over the entire supply chain and enhances accessibility and efficiency for eye care
Warby is expanding its technological lens capabilities through smart glasses, electrochromic technology, and lens customization and adaptability with anti-glare and polarization features
The market has an overly negative view on WRBY’s lower operating margins because investors are deterred by the lower gross margins Warby Parker has been experiencing. However, they misunderstand the reasons that the margins are lower for this year and recent quarters, and are wrongly viewing the lower margins as a long-term trend for the company.
Investors are worried by the lower gross margins Warby has been experiencing since adding a line of contact lenses through Scout, its subsidiary, in 2019, but they misunderstand the contact lens business.
The margins for contacts may be smaller than those for glasses, but the purchase frequency is higher
Consumers replace prescription eyewear every 2-2.5 years
Consumers reorder contact lenses every 6-12 months
Combined with Warby’s in-house eye exams, it allows the company’s optometrists, rather than outside optometrists with no connection to Scout, to give clients their contact prescription
70% of consumers buy glasses and contacts in the same location as their eye exam
Warby faces costs from making stores compliant with specific state regulations, but they’re just one-time costs that don’t say anything about the trend of the company’s future margins
The company is experiencing high costs in this area now
Greatly expanded its number of physical locations this year (around 40 new stores in 2022)
In the process of adding in-store eye exams to its line of offerings
One-time state-specific regulations
Some stores have to be converted to primary care locations according to state regulations
Converted 17 stores just in the first quarter
Some states don’t allow a retail optical location and an optometric office to have the same door
The market fails to understand and price in Warby Parker’s retail strategy. Warby Parker is redesigning the entire customer experience and has shifted away from a DTC only model to re-pivot towards omnichannel development.
The market is overly pessimistic about Warby Parker’s shift towards retail and thus undervalues Warby as a whole.
Retail Closures
More than 8,700 chain stores closed their doors in the first six months of 2021
Closures far outpaced store openings → Collapsing retail giants
Market Sentiment
Consumer Discretionary ETF are down 30.60% YTD
Retail and Online Retail ETFs are down ~50% YTD
Consumer Discretionary ETF are down 30.60% YTD
Retail and Online Retail ETFs are down ~50% YTD
Development of the omnichannel offsets these negative sentiments due to increase in revenue, encouragement of consumers to experiment with new Warby products, and integration of existing customer segments.
Physical Storefront Growth
Existing stores have paid back the original cost within 20 months
Average sales per square foot at $2,900. Top 5 in the entire retail industry - amongst Apple, Lululemon and Tiffany
Customers who engage with retailers on multiple channels visited a brick-and-mortar store 23% more often over six months
E-commerce sales accelerate and grow faster than they had been before the store opened in virtually every market”
Capabilities Rollout
Staffing stores with optometrists who provide eye exams, as well as the roll out of telehealth capabilities and virtual eye-exams
Built its own point-of-sale system, Point of Everything - synchronized data to access favorite frames from the website; past correspondence; shipping, payment, and prescription information
Increased functionality, data analysis, and capabilities on the website and in store
Taking insurance to ensure seamless experience
Valuation:
Our DCF and valuation of Warby Parker relies on our investment theses as key assumptions. Utilizing public comparables, we calculated an implied discount rate of 12.22% and terminal growth rate of 3%. Additionally, through a vertically integrated supply chain, we adjusted consensus forecasts to increase margins by ~50bps in a steadily growing industry. As stores continue to open and WRBY offers increased products, we expect growth to continue to accelerate through the omnichannel and DTC revenue segments. Taken together, WRBY will grow its domestic market share rapidly and grow margins to those similar to EssilorLuxottica. This concludes in an implied share price of $21.21 with almost 40% upside.
Risks/Mitigants:
Increasing customer acquisition costs interfere with achieving profitability - Customer acquisition costs are rising because of difficulty of acquiring customers online (recent investment in media ads). However, Warby Parker is very focused on expanding retail locations, and average retail CAC is ~$20 compared to the higher ~$40 e-commerce CAC
Reliance on third party vendors: supply chain issues and higher input costs - Warby Parker’s relatively inexpensive price point for this product market will allow for small price increases to offset input costs. Top five suppliers only make up 23% of sales, so they have a diversified group of suppliers. WRBY also controls much more of their supply chain than competitors, which allowed them to avoid large supply chain issues during the pandemic and beyond
Inability to compete with larger, more-established, companies - Warby Parker has grown and expanded in an industry that many view to be under a monopoly (Essilor Luxottica) in the past. However, since WRBY relies on a business model of repeat transactions rather than subscriptions, a company that optimizes unit economics and maximizes net promoter score wins. As suchWarby Parker NPS is ~80 vs industry average ~30: implying a more loyal customer base and lower long-term customer acquisition costs
Catalysts:
Warby Parker’s Virtual Vision Test gets 510(k) clearance from the FDA within 180 days
Accelerated retail store location expansion
Future earnings reports with favorable market outlook